(Reuters) - The world's largest chicken
breeder has discovered that a key breed of rooster has a genetic issue
that is reducing its fertility, adding to problems constraining U.S.
poultry production and raising prices at a time when beef and pork
prices are already at record highs.

The breed, Aviagen Group's standard Ross male, is sire through its
offspring to as much as 25 percent of the nation's chickens raised
for slaughter, said Aviagen spokeswoman Marla Robinson.

Sanderson Farms, the third-largest U.S. poultry producer and one of
Aviagen's largest customers, said it and Aviagen systematically
ruled out other possible causes for a decline in fertility before
determining a genetic issue was at the root of the problem.

The issue is hitting an industry that is already suffering from a
short supply of breeder birds.

The U.S. Agriculture Department last month reduced its U.S. chicken
production forecast for 2014, predicting only a 1 percent increase
in poundage from 2013, well below the long-run annual average of 4
percent. The agency predicted 2015 production would be up only 2.6
percent.

The limited growth in output is occurring as foreign demand for U.S.
chicken is on the rise. U.S. exports of poultry for meat are
projected to reach 3.4 million tons in 2014, up from 3.1 million
last year.

SENSITIVE BIRD

Aviagen, owned privately by EW Group of Germany, provides breeding
stock - hens and roosters - to Sanderson and other chicken
producers, which then breed the birds and hatch their eggs to
produce meat.

Sanderson last summer first identified an unusual reduction in chick
output involving the Ross breed. Mike Cockrell, Sanderson's chief
financial officer, said about 17 percent of eggs laid by Aviagen
hens mated with the rooster breed failed to hatch. Typically, the
failure rate is about 15 percent, he said.

Sanderson gradually eliminated a number of other potential factors,
including the temperature in hatcheries and the source of corn fed
to the birds, Cockrell said.

Aviagen sent a team of scientists to Sanderson last autumn to study
the issue and has acknowledged that an undisclosed change it made to
the breed's genetics made the birds "very sensitive" to being
overfed, he said.

"We fed him too much. He got fat. When he got big, he did not breed
as much as he was intended to," Cockrell said about the breed of
rooster. "The fertilization went way down, and our hatch has been
way down."

The chicken breeding company has replaced the breed suffering from
fertility issues with a new breed, and is mating it with the same
type of hens. It is too early to provide accurate projections for
their productivity, but "results to date are favorable," Robinson
said.

Sanderson expects to fully shift to the replacement breed by autumn,
Cockrell said.

REBUILDING EFFORT

The fertility problem is occurring at a time when the industry is
dealing with a shortage of breeder birds, which are in demand as the
sudden hike in beef and pork prices this year has renewed demand for
chicken.

The shortfall came about after breeders reduced their flocks when a
spike in feed prices in 2011 squeezed their profit margins,
according to Sanderson and poultry experts. While grain prices have
now fallen and demand for chicken is on the rise, U.S. poultry
breeders are still rebuilding their flocks.

Aviagen's Robinson declined to comment on the reasons breeder birds
are in tight supply. The nation's other major breeding company, Cobb
Vantress, owned by Tyson Foods, declined to comment for this
article.

A lack of accommodation for newly born breeder birds after the 2011
cutback is slowing the rebuilding process, said Paul Aho, a
consultant to Aviagen and a poultry economist.

Constrained production has helped push chicken prices in Georgia, a
key market, to record highs, analysts said. Boneless skinless
breasts there recently were priced at $2.21 a pound, up 4.5 percent
from a year earlier. The production shortfall is adding 50 cents per
pound to the cost of chicken breasts, which sell for about $2.02 per
pound in the northeastern United States, Aho said.

SCRAMBLING FOR
EGGS

The high prices would normally spur chicken companies to increase
production more than 5 percent from the prior year, had more breeder
birds been available, said Bill Roenigk, a former senior vice
president for the National Chicken Council.

In some cases, companies are trying to hatch eggs that would have
been discarded in the past for being the wrong size or damaged, he
said.

"Right now they're scrambling to really put any egg in the incubator
that can be in the incubator, and they're paying a price in terms of
not as good hatchability," he said.

Chicken producers also are keeping their hens laying eggs longer
than usual to compensate for the lack of new birds - as many as five
weeks beyond their typical cut-off age of 65 weeks. Eggs from older
hens tend to hatch at a lower rate.

JP Morgan in March said the number of eggs per laying hen fell below
the 10-year average for the first time since 2010.

"They don't have enough of these breeder birds and they also don't
have the quality that they would have had 10 years ago," said Will
Sawyer, vice president of food and agribusiness research for
Rabobank.

There is no sign that the tight supply of breeder birds and drop in
hatchability threatens human health.

SOARING PROFITS

High chicken prices due to the production constraints have helped
push up the stock prices of Tyson and Sanderson this year, by about
17 percent and 38 percent, respectively. Both Tyson and Sanderson
reported net income more than doubled in their fiscal second
quarters.

The price increase is especially painful for consumers as prices for
steaks and pork chops are up 10 percent this year due to drought and
disease affecting herds.

"There's nothing cheap to buy," said Ron Prestage, president-elect
of the National Pork Producers Council.

Shawna McLean, who lives with her husband and dog in Playa Del Rey,
California, said she now chooses meats based on what is on sale.
"I'm looking at the same chicken and the price has gone up about $3
in the last month," said the 48-year old, who is looking for a job.

(Additional reporting by Lisa Baertlein in Los Angeles; Editing by
David Greising and Martin Howell)